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Project
On
Verticle Agreement and Competition Law

Submitted to :

By:-
Rakhi Kumari
LLM 2017-18

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Chapter -I

1INTRODUCTION

This occurs when two or more undertakings which operate at different levels of the
production/distribution chain enter into an agreement, for example, agreements between
producers and retailers. The undertakings involved do not in any event compete with each other
because they operate at different levels of the market. The most popular vertical agreements are
distribution agreements and franchising agreements.

The ECJ in Joined Cases 56 and 58/64 Consten and Grundigconfirmed that vertical
agreements are within the scope of Article 101 TFEU in the following words:

“Article [Article 101 TFEU] refers in a general way to all agreements which distort
competition within the Common Market [Internal market] and does not lay down any distinction
between those agreements based on whether they are made between competitors operating at the
same level in the economic process or between non-competing persons operating at different
levels. In principle, no distinction can be made where the Treaty does not make any distinction.”

Assessment of vertical agreements under Article 101(1) TFEU

The concept of vertical agreements has been defined by the Commission in its Guidelines
on Vertical Restraints (hereafter referred as Vertical Guidelines),as “agreements or concerted
practices entered into between two or more companies each of which operates, for the purposes
of the agreement, at a different level of the production or distribution chain, and relating to the
conditions under which the parties may purchase, sell or resell certain goods or services.

Vertical Agreements

The Commission’s Vertical Guidelines provide the methodology for assessment of whether a
vertical agreement infringes Article 101(1) TFEU and if so, whether it may be justified under
Article 101(3) TFEU. Para. 110 of the Vertical Guidelines sets out nine factors relevant to the
assessment carried out under Article 101(1) TFEU such as

• The nature of the agreement;

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• The market position of the parties;

• The market position of competitors;
• The position of the buyers of the contract products;
• Entry barriers;
• The maturity of the market;
• The level of trade affected by the agreement’
• The nature of the product; and,
• Other factors, examples of which are given in para. 121 of the Vertical Guidelines, e.g.
whether there is a “cumulative effect” within the market of similar vertical agreements,
whether a restriction under the agreement was imposed by one party on the other rather
than agreed by them, and the regulatory environment.

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Chapter -II

Direct and indirect exports bans

The imposition of bans restricts competition by object and thus is contrary to the
objective of an integrated market as it prevents parallel imports and partitions the internal
market.

An example of an indirect ban is a withdrawal, by a French producer of cognac, of

discounts previously granted to its French distributor, when the latter exported the product to
Italy. Prices for cognac charged to distributors in Italy were 25 per cent higher than those
charged to similar distributors in France. Thus the producer’s aim was to discourage parallel
export (Gosme/Martell – DMP- ).

In DaimlerChrysler, the requirement that foreign customers should pay a 15 per cent
deposit for a new vehicle while no such requirement was imposed on locals was considered as an
indirect ban.

Selective distribution agreements

In selective distribution agreements the supplier sells the goods or services either directly or
indirectly only to distributors selected on the basis of specific criteria, and the distributors
undertake not to sell such goods or services to unauthorised distributors.

 Case 26/76 Metro-

The Vertical Guidelines restate the Metro test. The Guidelines make a distinction between purely
qualitative and quantitative selective agreements. Purely qualitative selective agreements are
outside the prohibition of Article 101(1) TFEU provided three conditions are satisfied:

■ The nature of the product in question necessitates a selective distribution system

(but this is no longer required under Regulation 330/2010);
■ Resellers must be chosen on the basis of objective criteria of a qualitative nature;
and,

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■ The objective criteria laid down must not go beyond what is necessary.
 Case C-439/09 Pierre Fabre- decided after into force of the Regulation. Held- de
facto prohibition of online sales imposed by a producer of products in context of
selective distribution agreements could not be justified by the need to provide
individual advice to consumers.

Franchising agreements

The nature of franchising agreements is that they contain licences of intellectual property
rights relating to trademarks or signs or know-how for the use and distribution of goods and
services, and that the franchisor provides technical and commercial assistance to the
franchisee during the life of the agreement. The franchisee gets to exercise the rights in
question and, in exchange, the franchisee pays a franchise fee for the use of the particular
business method. Franchising agreements usually contain a combination of different vertical
restraints relating to the manner in which the products must be distributed. (Case 161/84
Pronuptia)2.-

Pronuptia de Paris GmbH v Pronuptia de Paris IrmgardSchillgallis.

The case was concerned with franchising arrangements for wedding apparel. Under the
franchise, the franchisor granted the franchisee the exclusive right to use the Pronuptia mark
for a certain area; it agreed not to open another shop in that area, or aid any third party to do
so; and it assisted the franchisee in setting up the store, providing the know-how etc. In return
the franchisee, who remained the owner of the business, agreed to use the Pronuptia name; to
pay the franchisor a royalty on turnover; to purchase 80% of its requirements for wedding
dresses from the franchisor; and not to compete with any Pronuptia business. The Court
noted the diversity in types of franchise agreement: there were service, production, and
distribution franchise agreements. The judgment is directed at distribution franchises.

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The cumulative effect of exclusive purchasing agreements

Exclusive purchasing agreements in many ways closely resemble exclusive distribution

agreements. Under exclusive purchasing agreements the buyer is required to purchase goods
from the manufacturer. Both parties potentially benefit from that arrangement. Manufacturers are
able to calculate the demand for their product for the duration of the agreement, and adjust their
production accordingly; buyers, in exchange for their commitment, receive advantageous prices,
technical assistance, preference in supply, and so on (Case 23/67 Brasserie de Haecht (No.1)).

Block exemption regulations:

Block exemption regulations exempt classes of agreements (that is why they are called
“block” exemption regulations) such as exclusive distribution agreements, purchasing
agreements and agreements licensing IPRs, so long as the agreements conform to any exemption
regulations so adopted.

Commission Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) of the
Treaty on the Functioning of the European Union to categories of vertical agreements and
concerted practices

Regulation 330/2010 entered into force on 1 June 2010 and is expected to expire on 31
May 2022

Regulation 330/2010

It applies in the following agreements:

1. All vertical agreements between non-competitors where the supplier of goods or

services under the agreement has a share in the relevant product market of less
than 30 per cent and the market share of the buyer does not exceed 30 per cent of
the relevant market.
2. Vertical agreements entered into between an association of undertakings and its
members, or between such an association and its suppliers if:

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(i) all the members of the association are retailers of goods (not services);
and,
(ii) each member has a turnover not exceeding € 50 million.
3. Vertical non-reciprocal agreements between competitors within the market share
thresholds specified in point 1 above but only if:
(i) the supplier is a manufacturer and a distributor of goods while the buyer is
only a distributor and not a competing undertaking at the manufacturing
level; or,
(ii) the supplier supplies services at several levels of trade while the buyer
does not provide competing services at the same level at which it
purchases the contract services.
4. To vertical agreements containing provisions relating to the assignment /use of
IPRs and which are within the market share threshold specified in point 1 where
five conditions are satisfied.

Para 23 of the Vertical Guidelines states that “hard-core restrictions’ set out in Article 4
of the Regulation restrict competition by “object”. As a result, they can only be justified under
Article 101(3) TFEU

Article 4 of Regulation 330/2010

Article 4(a): the restriction of the buyer’s ability to determine its sale price (i.e. resale price
maintenance), except the setting of maximum resale prices or of recommended resale prices
provided that they do not, in practice, amount to fixed or minimum resale prices.

Article 4(b): Restrictions of the territory into which, or of the customers to whom, a buyer may
sell. In four situations restrictions on territory or customer exclusivity are permitted:

(i) Restrictions on active sales into the exclusive territory or to an exclusive group reserved
to the supplier or allocated by the supplier to another buyer, where such a restriction does
not limit sales by the customers of the buyer.

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(ii) Restrictions on both active and passive sales to end users by a buyer operating at the
wholesale level;
(iii)Restrictions on sales, both active and passive, and at any level of trade, by members of a
selective distribution system to unauthorised distributors in the territory where that
system is currently in operation and also in the territory where the supplier does not yet
sell the contract product; and,

(iv) restrictions on sales, active and passive, of goods or services which are supplied for the
purpose of incorporation into other products which would compete with those of the
supplier.

Article 4 (c) prohibits restrictions of active or passive sales to users, whether professional end
users or final customers, by members of a selective distribution system operating at the retail
level of trade;

Article 4 (d) prohibits restriction of cross-supplies between distributors within a selective

distribution system, including between distributors at different levels of trade; and,

Article 4 (e) prohibits restrictions which prevent end-users, i.e. repairers and service providers,
from obtaining spare parts directly from the manufacturers of those parts, in a situation where
repairers and service providers are not entrusted by the buyer with the repair or servicing of its
goods.

Article 5 of Regulation 330/2010

Article 5 of the Regulation concerns non-compete clauses which, although prohibited, are
severable from the agreement. This means that such clauses will be invalid while the remainder
of the agreement can benefit from the block exemption.

The following are prohibited:

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 Any direct or indirect obligation imposed on members of a selective distribution

scheme to sell or not to sell “specified brands” of competing suppliers;
 A non-competition obligation on the buyer exceeding five years in duration,
unless the goods to which the agreement relates are intended to be resold by the
buyer from premises owned or leased by the supplier, provided that the duration
of the non-competition obligation does not exceed the period of occupancy of the
premises by the buyer; and,
 Post-term non-compete obligations. Article 5(1)(b) states that “any direct or
indirect obligation causing the buyer , after termination of the agreement, not to
manufacture, purchase, sell or resell goods or service” is prohibited. This is
unless the obligations: relate to goods or services competing with contract goods
or services , are limited to the premises and land from which the buyer has
operated during the agreement, are indispensable to protect know-how transferred
by the supplier under the agreement, and are limited to a period of one year.

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Chapter – III

Conclusion

Competition Law is a complex mixture of a country's law, economics and administrative action
intended to favour competition in the economy. Since competition is seen as critical to economic
development, competition law seeks to protect this competitiveness in the economy. The
underlying theory behind competition law is the positive effect of competition in an economy's
market, acting as a safeguard against misuse of economic power. The link between competition
law and economic development emphasized over and over again seems rather undeniable and the
need for competition law seems like the order of the day. The operation of competition law by
prevention of anti-competitive agreements, prohibiting abuse of dominant position by firms and
regulation of combinations which might adversely affect competition in the economy, thus seems
crucial for India. It is therefore keeping that in mind that the Indian Parliament enacted the
Competition Act, 2002.

The preamble and the statement of objects and reasons of the Act, also evidence that the broad
economic development objectives were a consideration to adopting the Act. During the past
years, the number of jurisdictions with a competition law has exploded from approximately 25,
of which few were seriously enforced, to some 100 today. With economic activity increasingly
transcending national borders, and jurisdictions applying competition laws to firms and conduct
outside their borders, achieving at least a reasonable degree of coherence and convergence in the
application of competition laws is important for both competition agencies and firms. Even
though the Indian competition law is modeled along the lines of EC law, the Commission is in no
way bound to interpret similar provisions in the Indian law in the manner interpreted under the
EC law.

The Commission on the other hand is bound by the Preamble of the Act to interpret it in a
fashion that promotes economic development of the country. This is because the conditions that
exist in India are remarkably different than those that exist in the EC and to come to the level
where there can be talk of similar interpretation of laws in the two jurisdictions, similar
development level would necessarily be a condition precedent. A few amendments that could be
added to Competition

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Act can be as follows: Abbreviated rule of reason can be developed especially with regard to
cartel cases Outer limit of 210 days is given to the CCI under the CA 2002. However the CCI
aims at clearing at notices within 180 days. This may lead to unnecessary delays and back logs.
Threshold limits for triggering CA are very high especially with regard to a country like India
where small industries are prevalent. Hence, it should be taken into consideration that there
might be many small enterprises entering into mergers which may have AAEC but may not
trigger the combination regulations under section 5. Leniency provisions have been prevalent in
India since the beginning of the act but there has been no instance of anyone coming to claim
them. The penalties under the act should be hiked in this case so that a deterrent effect is created
and leniency provisions are made attractive. While the basic principles of competition law
remain the same the objectives or the results cannot be the same for all jurisdictions. In essence,
a progressive realisation of competition policy goals would be the answer to an effective
competition law regime in developing countries. While the implementation of competition law
even at the early stages of economic development is not bad per se its blind implementation
following the path of the developed countries can kill its very objectives. Thus, competition law
is a complex creation of lawmakers which the Indian Government and the Competition
Commission should take time to understand in light of the special needs and requirements of the
Indian economy and implement it accordingly.

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BIBLIOGRAPHY

BOOKS

SM Dugar, ―GUIDE TO COMPETITION LAW‖ 5th Edn 2010, Vol 1, Lexis Nexis
Butterwoths Wadhwa Nagpur;

Richard Wish, ―COMPETITION LAW‖,6 Edn, Oxford University Press; Ramappa T.,
Competition Law in India, (Oxford India Paperbacks, New Delhi, 2009)

Douglas F. Broder, A guide to US Antitrust Law, 2005, Sweet & Maxwell Ltd.

Singh, Rahul,‗The Teeter-Totter of Regulation and Competition: Balancing the Indian

Competition Commission with the Sectoral Regulators‘.

ARTICLES

Dhall Vinod, The Indian Competition Act, 2002 Competition Law Today; Concepts, Issues, and
Law in Practice, Oxford University Press,(2007), P 499-540.

Fox Eleanor M., World competition law- Conflicts, Convergence, Cooperation Competition Law
Today; Concepts, Issues, and Law in Practice, Oxford University Press, (2007), P 224- 249.

WEBLIOGRAPHY

http://www.oft.gov.uk/

http://www.cci.gov.in/

http://ec.europa.eu/comm/competition/index_en.html

http://www.internationalcompetitionnetwork.org/

http://www.wto.org/

http://www.competition-commission.org.uk/

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